Regions and Countries

	Table of Contents
p. 6 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy III. The Asian Development Bank's Development Experience IV. The Asian Development Bank's Strategy V. The Asian Development Bank's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program Update 2004-2006: Kazakhstan

---

V. The Asian Development Bank's Assistance Program

A. Overall Assistance Level

39. ADB’s past lending to Kazakhstan is shown in Figure 5. The sharp turnaround in the economic situation during the past three years slowed public sector lending of almost all development partners. However, despite the improved fiscal situation public investment remained low at 1.5–3.5% of GDP. Since 2002, the Government began preparing three-year rolling indicative plans, which, along with preparing the CSP, helped the Government reappraise its development and borrowing strategies, and recognize that it had to be more active in improving living standards using the new fiscal space provided by oil revenues. This means modest increases—by 2 percentage points of GDP annually—in public investment in the medium term. Reappraisal of the borrowing strategies indicates that, in the medium term, the Government will seek external financing of 30% of the budget deficit net of privatization receipts. This may mean external borrowing—official and commercial—of nearly 0.5% of GDP, of which the Government has proposed that ADB provide about $50 million annually during 2004–2006. It is difficult to say how firm the Government consensus is on the proposed lending level and whether this consensus will hold should oil revenue be higher than expected.

40. Four loans to Kazakhstan are proposed for 2004–2006, for a total amount of $190 million, including two standby loans for $100 million (Appendix 1, Table A1.10; and Appendix 4 for concept papers): two loans for the agriculture and natural resource management, one for rural water supply, and one for transport.

41. Nonlending assistance will support the lending pipeline. Despite increasing constraints, the TA program funded from the Technical Assistance Special Fund and Japan Special Fund will be maintained at $1.7 million per year, which is approximately equal to the average of the last three years (Appendix 1, Table A1.11; and Appendix 5 for concept papers). Cofinancing possibilities will have to be pursued to support priority projects beyond this amount. The Government’s proposal to launch an education research program jointly funded with ADB, and potential adjustments in TA costs sharing (to be discussed with the Government during CSP implementation) are other means of leveraging institutional and policy reforms and capacity enhancements with ADB TA resources.

Top

B. Asian Development Bank Assistance for the Strategic Priorities³⁸

1. Inclusive Growth through Private Sector Development

42. Box 5 (next page) summarizes the 2004–2006 ADB program under this focal area. Figure 6 shows the link between ADB assistance and specific MDGs. Private sector investment is hindered by (i) institutional constraints, (ii) lack of quality infrastructure, (iii) lack of finance for investment, and (iv) shortage of skills. The proposed ADB interventions will help alleviate the first three constraints. To lessen the fourth, ADB will engage the Government through the ongoing advisory support for the education sector development strategy (see the following section on human development) and explore the use of the Japan Fund for Information and Communication Technology (JFICT) to support ICT and distance education.

a. Road Infrastructure

43. ADB assistance aims to improve the quality of roads in strategic corridors and support sector policy development, in line with ADB experience—one project completed, one ongoing, and a third one due for approval in 2003—and Government plans that prioritize international transit corridors. The Government’s transport policy is to create international transport links that facilitate trade and economic growth. The Government has thus identified five road corridors as strategic components of the national transportation system. ADB’s past, ongoing, and proposed assistance supports two of the five corridors. ADB assistance for policy development will focus on improvements to transport services through support for intermodal project development and creation of competitive transport markets. A key feature of ADB assistance in the transport sector is close development partner coordination. Each project—completed, ongoing, and planned—in this sector is jointly funded with another donor (Appendix 3).

b. Rural Development

44. Based on ADB’s sector experience and rural sector needs, assistance to the agriculture sector will help reduce constraints on the emergence of market-oriented, competitive, and diversified agricultural enterprises by supporting the following: (i) improving rural public infrastructure (irrigation and drainage facilities, farm-to-market access roads, and market facilities); (ii) deepening reforms at local government level to promote private sector investment; (iii) building capacity of agencies and local governments, particularly to plan, implement, and monitor regional rural development; (iv) developing community-based associations; and (v) introducing improved farm technologies. ADB assistance will be coordinated with interventions of other development partners, particularly the World Bank, EBRD, European Union, and Food and Agricultural Organization (FAO). Interventions in the agriculture sector will be accompanied by improvements in access to social services in rural areas (water supply, sanitation, and education) and an effort to geographically focus ADB assistance for holistic rural development (Appendix 3).

c. Private Sector Operations

45. Private sector operations will figure prominently in achieving CSP objectives. Government officials support ADB starting private sector operations.³⁹ Private sector operations will focus on the financial sector, capital markets, and large infrastructure projects where government ownership is limited or non-existent. ADB will continue its discussions with the Kazakhstan Development Bank (KDB), which have been encouraged and initiated by the Government, on potential co-financing. ADB may offer a combination of equity (and quasi-equity), debt, and/or partial credit or political risk guarantees. In the short term, private sector operations will include provision of SME credit lines to several local commercial banks, as well as possible collaboration with EBRD in connection with its Trade Finance Facilitation Program. Indicative projects that ADB might consider during the CSP will include the following:

1. provision of equity and/or subordinated debt to one or more local banks as well as designated credit lines;
2. equity investments or provision of credit lines to leasing companies;
3. trade finance facilitation through partial credit guarantees;
4. credit enhancement for asset securitization, including but not limited to mortgages and leases;
5. equity investment in funds;
6. equity and/or debt financing in infrastructure projects in sectors such as water, power, transport, and telecommunications;
7. financing of other local businesses via financial intermediaries, especially on a co-financing basis with KDB, potentially funded by issuing local currency bonds; and
8. other investments consistent with ADB's mission and objectives and private sector operation strategies.

d. Governance

46. ADB will help formulate and implement an effective competition policy to diminish opportunities for rent—seeking behavior and corruption, which hinder inclusive growth (Appendix 3). A series of TA will be provided through CAREC to strengthen customs institutions and cooperation in the Central Asian republics as well as facilities and institutions to manage trade flows at the borders. CAREC will also support institutional strengthening through sectoral interventions.

2. Human Development

47. Box 6 summarizes the 2004–2006 ADB program for human development. Figure 7 shows the link between ADB assistance and specific MDGs.

a. Rural Water Supply

48. Through a proposed sector loan scheduled for 2003 approval and a second phase loan included in the forward program, ADB will support government efforts to improve potable water supply through decentralized small systems. The strategy combines development of local groundwater sources and rehabilitation of segments of existing pipelines where viable, or construction of completely new local networks. The highly dispersed rural settlements make it inappropriate to replace or extensively rehabilitate the Soviet-era group water pipelines traversing large areas. Water supply systems management should be decentralized to as close to the user level as possible. The proposed project will follow the same strategy. ADB will support the following major policy areas: (i) appropriate technology, (ii) "user pays" principle, and (iii) beneficiary participation in implementation and O&M. The water tariff system should balance affordability and cost recovery, including fair return on investment. ADB supports the Government in identifying the optimum level of subsidy and its balance between central and local governments. Cost recovery may aim at O&M costs at first and gradually extend to capital cost as well. ADB also helps the Government optimally delineate responsibilities for water supply between the central and local levels (Appendix 3).

b. Education

49. ADB’s involvement in the education sector since 1995, with the support of two investment projects in basic education and two TAs, helped mitigate the adverse impact of fiscal tightness on sector investments and helped lay the foundation for sector reforms. The ongoing social expenditure review⁴⁰ provides the Government with an analytical basis to use budgeted public resources to achieve better education and health outcomes. Building on this review, the ongoing education sector development strategy TA is helping the Government prepare a comprehensive sector strategy that will include a sector reform program, organization plan, and financing plan. The TA is timely as it will: (i) interface with the preparation of an education plan to help implement the recently approved Industrial Innovation Strategy, and (ii) help the Government determine if it needs to increase its rate of public spending per student. The Government has not requested a new TA or loan for the forward program. ADB plans to help the Government with a series of brief but topical policy notes integrated with the ongoing overall strategy formulation. ADB could consider preparation of policy notes under the auspices of jointly funded education research program that the Government has proposed ADB to lead. It will explore the use of JFICT to support ICT and distance education, particularly in rural areas (Appendix 3).

c. Governance

50. Besides sectoral institutional support, interventions for 2004–2006 will help national and subnational governments⁴¹ coordinate and plan public spending for human development. The proposed TAs build on the ongoing TA to strengthen the institutional capacities to implement the national poverty reduction strategy, and three TAs planned for 2003 approval. These TAs will help the Government (i) coordinate policy and plan investment, (ii) decentralize public spending, and (iii) increase capacity to monitor and evaluate implementation of development projects. All activities under the ongoing and planned TAs have been carefully thought out as a cluster with close involvement of the Government. They are an important means to channel ADB assistance to improve governance of public spending for human development (Appendix 3).

3. Sustainable Environment Management

51. Box 7 summarizes the 2004–2006 ADB program for sustainable environment management. Figure 8 shows the link between ADB assistance and specific MDGs. Agriculture uses about four fifths of all the country’s water. Irrigation technologies are water intensive, and half the used water filters into the ground, causing waterlogging and salinization in some areas while worsening water shortages elsewhere. Improving management of water resources is vital for sustainable environment. Depending on the midterm evaluation of the economic benefits from the first Water Resources Management and Land Improvement Project, a follow-up project will be formulated. The forward program includes three TAs focusing on institutional strengthening for sustainable natural resource management including transboundary water management (Appendix 3).

4. Regional Cooperation

52. Box 8 includes the activities planned under CAREC to support regional cooperation. They supplement ADB assistance proposed under the CSP. A separate exercise to prepare the regional CSP for CARs is under way. The assistance program in Box 7 may change. Any changes will be reported through CSP annual updates.

Top

C. External Funding Coordination and Partnership Arrangements

53. ADB closely coordinates its operations with IFIs (EBRD, Islamic Development Bank, IMF, and World Bank); agencies under the United Nations (UN); and bilateral development partners. Besides country-level coordination, close sector- and project-level coordination has been maintained. ADB’s Kazakhstan Resident Mission has been central in coordinating the development partners, primarily through monthly meetings with their representatives. The consultative group for Kazakhstan was discontinued in 1996. The Government, however, has recently shown its readiness to lead in aid coordination. The close sector- and project-level coordination is evident from the large number of jointly financed projects. Each road and water supply project, whether ongoing or in the pipeline, is jointly financed. In the road sector, close contact has been maintained with JBIC. In agriculture and natural resources management, where the World Bank and ADB have ongoing and planned interventions, close coordination has been maintained. In agriculture projects, ADB is planning to focus on rural infrastructure, while the World Bank has focused more on farm restructuring and agricultural productivity. Water resources management efforts are complementary, with ADB developing groundwater, and the World Bank, surface water. In education, while ADB is the only partner providing loans, it coordinates with UN agencies and bilateral partners. ADB’s Private Sector Department has kept in close touch with EBRD and United States Agency for International Development (USAID) in planning SME and trade financing investments. The planned fiscal decentralization TAs will be developed in consultation with USAID and other bilateral agencies. ADB TA trust funds provide another avenue for coordination. Three governance TAs planned for 2003 approval received cofinancing from the Governance Cooperation Fund, to which the Governments of Canada and Norway contribute. ADB will continue to pursue cofinancing from the TA trust funds to maximize knowledge transfer to Kazakhstan, which is the central objective of the CSP. Details of external assistance provided to Kazakhstan by development partners are in Appendix 1, Table A1.5.

54. In conjunction with its lending program, ADB will continue to pursue cofinancing from official and commercial sources to address the thematic priorities for ADB operations.⁴² ADB will maintain its dialogue with the Government to identify financing for the projects it will support during 2004-2006, specifically the use of credit enhancement products.

55. ADB intensively consulted with development partners throughout the process of preparing the CSP. Several rounds of consultations, with individual partners as well as with all the partners as a group were held. The CSP mission followed the practice of meeting partners individually at the beginning of each mission and then in a group at the end of the mission.

____________________

Back IV. The Asian Development Bank's Strategy	Next VI. Risks and Performance Monitoring and Evaluation